GAO Pressures FHFA on Principal Reduction

An independent government watchdog has a sharp message for the federal agency that must decide whether to allow principal reductions on hundreds of thousands of government-backed mortgages: Time's wasting.

Earlier this year, the Federal Housing Finance Agency (FHFA) assured congressional Democrats who have been calling for targeted write-downs of Fannie Mae and Freddie Mac mortgages that it would reach a decision by the end of April. But the agency is now two months behind that self-imposed deadline.

In a report scheduled to be released Thursday, which was obtained by ASR sister publication American Banker, the Government Accountability Office (GAO) ratcheted up the pressure on the FHFA.

Noting that the Obama Administration's loan modification program, which would be used to implement any principal reductions, expires at the end of December 2013, the GAO wrote: "it is critical that FHFA take the steps needed to expeditiously make a decision."

In a written response to the report, an FHFA official stated that it intends to release an updated analysis of principal reductions "in the near future," but the agency did not commit to a specific timetable.

The FHFA also sought to downplay expectations for any principal forgiveness program, stating that although 700,000 borrowers could potentially benefit, it estimates that only about 233,000 households would actually participate.

In its report, the GAO did not endorse principal reductions, but it did list numerous criticisms that have been leveled against the FHFA's earlier analyses of the issue. In those analyses, the FHFA concluded that it was not in the best interests of taxpayers to allow principal reductions on loans owned by the two government-backed housing giants.

The GAO stated that its own analysis of the issue was inconclusive. "However, private investors and lenders that hold loans in their portfolio have used principal forgiveness, suggesting that this foreclosure mitigation tool may be effective in certain circumstances," the report stated.

Ed DeMarco, the acting director of FHFA, has been under considerable pressure from the Obama administration and Congressional Democrats to act, with some lawmakers going as far as to demand DeMarco resign. But President Obama has not yet nominated a replacement for DeMarco nor has it sought his dismissal.

DeMarco has consistently said that reducing principal is not the best strategy to provide the best return for taxpayer investments in Fannie Mae and Freddie Mac, and will create bad incentives for homeowners who are current on their mortgages.

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